Broadened Medicare tax likely to spur backlash

President Barack Obama’s healthcare plan broadens the Medicare tax to unearned income, a move that will likely provoke a strong political backlash from lobbyists.

Under current law, people who earn a salary pay the Medicare HI tax on their earned income, but those who have substantial unearned income do not this tax.

Obama’s plan adds a 2.9 percent assessment on “income from interest, dividends, annuities, royalties and rents, other than such income which is derived in the ordinary course of a trade or business which is not a passive activity (e.g., income from active participation in S corporations) on taxpayers with respect to income above $200,000 for singles and $250,000 for married couples filing jointly,” state the White House summary of the proposal released today.

Senate lawmakers declined to add a similar provision to their reform bill. Sen. Debbie Stabenow (D-Mich.) floated the idea of applying a Medicare payroll tax to investment income. The proposal exempted retirement accounts from the tax and would raise $111 billion over 10 years, according to an estimate by the Joint Committee on Taxation. The measure was not added to the bill, in part because of concerns over how the provision would affect investments.

During bicameral negotiations on health care reform in January, House leaders pushed to include a Medicare tax on investments.